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March 1, 2022updated 22 Jun 2022 1:21pm

Does Kyndryl have a future as an independent business?

The IT services provider that spun out of IBM last year needs to find its identity fast if it is to make an impact in a crowded market.

By Matthew Gooding

IT services provider Kyndryl’s financial results for 2021, published in March 2022, do not paint a rosy picture for the company. It reported a net loss of $2.3bn, up from $2bn in 2020, and saw revenue decline 5% year-on-year, to $18.5bn. Though chief financial officer David Wyshner tried his best to put a positive spin on the numbers, they reflect the challenges Kyndryl has faced since it was spun off from IBM in November.

Future of Kyndryl Kyndryl launched on the New York Stock Exchange in November, but has since seen its share price slump. (Photo courtesy of Kyndryl press office)

“Kyndryl is quickly building the foundation for long-term growth,” Wyshner said. “We are investing in skills and partnerships in order to grow profits and establishing impactful global practices to help Kyndryl and our customers capture value. Kyndryl will continue to lead our industry by leveraging our scale and alliances in a broad and expanding market for digital transformation.”

But while the market is undoubtedly broad and expanding, it is also highly competitive. Kyndryl has signed several important partnerships in recent months which suggest it is aiming to provide the kind of services businesses are putting at the centre of their digital transformation plans. But it will need to establish its niche quickly if it is to win new business ahead of its rivals and find success as an independent company.

What is Kyndryl? The story so far

Kyndryl was formed when IBM decided to spin off its managed infrastructure division, a move first announced in October 2020. With Big Blue focusing on hybrid cloud services, it decided the infrastructure side of its business, which includes supporting many legacy technologies, was not worthy of continued investment.

“IBM is laser-focused on the $1trn hybrid cloud opportunity,” Arvind Krishna, IBM CEO, said at the time. “Client buying needs for application and infrastructure services are diverging, while adoption of our hybrid cloud platform is accelerating. Now is the right time to create two market-leading companies focused on what they do best.”

The move created an independent public company, Kyndryl, with 90,000 employees and 4,600 enterprise clients spread across more than 100 countries. The new company has “more than twice the scale” of its nearest competitor in infrastructure services, IBM said at the time. Led by IBM veteran Martin Schroeter, the company debuted on the New York Stock Exchange in November, but has seen its share price decline sharply ever since.

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Will AWS and the cloud save Kyndryl?

In search of growth, Kyndryl is looking to the cloud. Last week, it signed a deal with AWS, the world's leading cloud provider, which will see the two companies work together to help customers navigate digital transformation. It follows similar pacts with the other two biggest players in the public cloud market, Microsoft Azure and Google, which were inked in November and December respectively.

These deals would not have been possible as part of IBM, says Kate Hanaghan, chief research officer at TechMarketView, as they would have conflicted with IBM's own cloud offering. By working with the hyperscalers and other leading IT vendors (Kyndryl also has agreements in place with SAP and VMWare), she believes the company is laying foundations for a potentially successful future.

"They've made progress strategically," Hanaghan says. "These partnerships are important because they present growth opportunities for a company which isn't growing at the moment. They're by far the biggest managed infrastructure provider on the market, but their customer base is still very much focused on its heritage with some big former IBM customers."

Hanaghan also believes that Kyndryl's management has taken steps to establish a company culture more forward-thinking than IBM's, offering staff the opportunity for additional training and accreditation. "That's no small undertaking," she says.

However, Joel Martin, research leader for cloud and SaaS strategies at HFS Research, says Kyndryl's USP remains unclear. "Our view is that they have really struggled with what their big differentiator is, and how they are going to benefit the market," he says. "If you have some IBM-Z servers and the need to work with a company that has a strong pedigree in private cloud and the ability to bring in public cloud services too, Kyndryl is bringing that to market. The problem is, so is everyone else."

What is the future for Kyndryl after IBM split?

TechMarketView's Hanaghan says the priority for Kyndryl will be to convince existing customers it is essential to their modernisation plans. "Their focus is moving from not just providing things like heritage data centres but to taking those customers on their digital transformation journey," she says.

"They've got really strong relationships, particularly in financial services, which have been in place for years, so they are still seen as a very safe bet," Hanaghan explains. "Now they need to convince those customers they can do the next stage [of digital transformation] and with the partnerships they are putting in place I think you reasonably assume they will be able to do that."

Martin also believes the future of Kyndryl should involve playing to its strengths in finance and other heavily regulated markets, as well as the defence sector. "It is a trusted provider for highly sensitive information, and will continue to play strongly in that space, particularly in North America," he says. "It needs to figure out where else it wants to play, and potentially partner with other companies in different geographies and outside its core business areas."

Beyond that, things could get more difficult, with myriad IT services providers, and the cloud hyperscalers themselves, already offering the kind of services Kyndryl is seeking to supply to customers. Here its size and legacy could be a disadvantage, with smaller, cloud-native companies better placed to deliver, Martin says.

One part of the market that could be a useful one for Kyndryl is services relating to 5G. Last month it did a deal with Nokia to supply 5G services for private networks built on Nokia hardware, and Martin believes more similar agreements could be fruitful.

"They say 5G and data are core assets of theirs, but we haven't seen them expand this into a particularly compelling offering," he says. "Infosys, Tech Mahindra and all the other players are making moves in this area. If Kyndryl is going to survive it needs to become a more scrappy company – it needs to scrap for business [in areas like 5G]. Otherwise it can just milk its existing contracts dry and become the next Blackberry."

To win business outside its traditional customer base, says Rob Enderle, president and principal analyst at Enderle Group, Kyndryl may need fresh talent in its management team. "They've got to turn something which is largely a legacy business into something which is fresh and relevant," he says. "A lot of them will have never done this before having been part of a large conglomerate at IBM, so I think they will need to bring in some new voices, some people who are willing to think outside the IBM box and really do what IBM services could not."

Is Kyndryl an acquisition target?

Although its own spin-off from IBM happened a mere few months ago, Hanaghan says Kyndryl's leadership may already be looking at ditching some areas of the company. "It could 'do an IBM' and look to spin off some of its own business to become smaller and then start to acquire into other areas," she says.

"Growing organically is really difficult, so I wouldn't be surprised if we start to see Kyndryl do what IBM did to Kyndryl." It may "not be as clear cut as that," she adds, as the company "may just stop renewing contracts in certain areas".

"So far Kyndryl has pitched its size as a competitive advantage, but the other side of that coin is that it's big in areas of the market that are in decline," Hanaghan says.

Martin believes the company's low share price could make it an acquisition target. "A large European player that wanted to bolster its presence in North America, particularly in defence and the public sector, could find it a very attractive target at its current valuation," he says. "I wouldn't say the current management is dressing it up for sale, but I do feel they have been given a chance to see what they can do with the business. But they have yet to come up with a clear simple message to take to market about what makes it a compelling proposition."

Kyndryl's digital transformation credentials

For CIOs at large organisations looking for digital transformation partners, Hanaghan says Kyndryl's scale and experience may make it an attractive choice. "They may not be the fastest or most agile company on the market, but because of its size there will be a lot of people who look at Kyndryl and think it is a good fit," she says. "But if you're a CIO who is edging forward into new digital areas it may be more beneficial to work with a smaller provider that can deliver small pilots or proofs of concept, and do it cheaper."

HFS Research's Martin agrees. "If you have a heavy investment in IBM assets but don't necessarily want to deal with IBM, Kyndryl makes a lot of sense," He says. "And if you're in a heavily regulated industry with a lot of oversight, such as the public sector or financial services where slow and steady wins the race, it's definitely worth considering." But, he says, "if you're looking for a rapid change that will reimagine your business, why would you not just go to one of the hyperscalers directly?"

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